LBO Interview Questions

Walk me through an LBO analysis.

Which variables have the greatest impact on LBO returns?

What factors increase an LBO's IRR?

Would you rather invest in a company with $2B EV (50% debt / 50% equity) or $2B EV (100% equity) — assuming both EVs grow 2x over 3 years and debt stays constant?

What are the main ways a company can use cash?

Rank the layers of a typical LBO capital stack from most senior to most junior.

What's the difference between Chapter 11 and Chapter 7 bankruptcy?

What's the difference between MOIC and IRR, and which matters more to a PE firm?

What are debt covenants and what types exist?

What are the three main ways a PE firm creates value in an LBO?

What makes an ideal LBO candidate?

How do you determine how much debt a company can take on in an LBO?

What is a dividend recapitalization in PE?

What are the main leverage ratios used in LBO underwriting?

What is rollover equity and why might management agree to it?

Calculate the implied starting sponsor equity. Required IRR = 25%, ending equity value = $306M, exit year = 5.

Why does an LBO typically produce a lower valuation than a DCF?

How are deferred financing fees treated on the balance sheet in an LBO?

What's the difference between a bond and a loan?

Would you rather LBO a services company or a products manufacturer?

Walk through the pros and cons of different exit strategies for an LBO portfolio company.

What are the main ways a PE sponsor can extract liquidity from an LBO portfolio company without a full exit?

What are the main drivers / causes of corporate distress?

What are the options for a company facing distress or a liquidity crunch?

A bond trades at $80, has a 10% coupon, $100 par, and matures in 1 year. What's the yield?

What is a dividend recapitalization? When might it not be a good idea?

Should an LBO's IRR be higher or lower than the target's WACC?

How do you decide how much leverage to use in an LBO?

Why would a distressed company prefer out-of-court restructuring over Chapter 11?

Quick YTM estimate: bond at $70, 14% coupon, 5 years to maturity. What's YTM?

What is DIP (Debtor-in-Possession) financing?

What is a cash flow sweep in an LBO?

A PE firm buys a company for 10x EBITDA with $500M EBITDA and 60% debt financing. EBITDA grows at 10% annually for 5 years. The firm exits at 10x EBITDA. Debt is constant. What is the approximate MOIC?

What goes into a 'sources and uses' table in an LBO?

What is a secondary buyout (SBO) and why are they common?

Company has $50M EBITDA at a 6x multiple, $200M bank debt and $200M high-yield debt. What is each tranche trading at?

$150 secured debt, $200 unsecured debt, $400 subordinated debt. Enterprise value is $300. Calculate recovery rates for each tranche.

What is a springing maturity provision in a debt agreement?

What's the difference between HoldCo debt and OpCo debt? Why does this matter for recovery?

Reverse paper LBO: bought at $400 EV, 5-year hold. EBITDA stays $100, sold at 4x. 2.5x MOIC achieved. D&A $40, interest 10%, no tax, no NWC change, CapEx $40. What was the original equity check?

Two bonds have the same price, face value, and coupon — but different maturities. Which has the higher YTM?

Calculate company liquidity: $50M cash, $10M due to vendors, $90M ABL revolver borrowing base, $35M already drawn, ABL collateralized at 85% advance rate against $100M of AR.

What is a fulcrum security?

What is the 'option value of equity' for a distressed company?

How do you decompose LBO equity returns into operating improvements, multiple expansion, and debt paydown?

Company has $30M EBITDA, purchase multiple 10x, $100M of debt used. FCF is $30M/year. EBITDA stays flat. Find the breakeven exit multiple after 2 years.